Gross Negligence Penalty Now Mandatory?
February 28, 2019 Andrew AdolphGross Negligence Penalty
I was a CRA auditor for almost 25 years. At the time I was hired, it was to be one of the very first auditors for a brand-new tax, the goods and services tax (GST).
A lot has changed in those times. I remember the early days of my career with great fondness. I was proud of the job I did, and I did it well. The GST was brought in to deal with a runaway deficit at the time, which it did within a few years.
At the point I left CRA in 2014, I had long abandoned being proud of my job. Leaving a well-paying job was difficult, but looking back five years later, I am glad I did.
When we were first hired as auditors, there was a cardinal rule that was always observed: if you complete an audit and the Notice of Assessment was finalized, and you later discover more stuff you missed, you leave it be unless it was really bad. Why?: there was an appreciation 30 years ago for the disruption our activities cause to businesses. The image of the department meant a lot to us.
We also were taught back then that the devices we rely upon are education and fear, with the latter term also known also known as “the stick. We were told to use education as much as possible, and leave fear for the tougher cases.
Finding audit assessments for me at least was very easy. Almost everybody I went out to made mistakes. An audit assessment meant that you had to pay the tax, plus a 6% penalty, plus interest. Penalty and interest, or PAIN for short.
The Beginning of the Dark Ages for CRA, at least in my opinion
In about 2000, CRA changed from being a department that serves people to an Agency, more closely aligned with the Internal Revenue Service than with a government department that serves people.
Outside the walls the only thing people noticed at first was the name change from Revenue Canada to Canada Revenue Agency. Inside the walls, one of the things that I noticed in our office was a new corporate development unit that seemed to pop up out of nowhere. Behind the scenes, the executives at the highest level were bringing in a regime that would pay them bonuses based on the results of audits, and how much they brought in.
Today, the pressure is on auditors now to produce TEBA, which stands for Tax Earned by Auditor. If you ask anybody in CRA management about TEBA, they will deny it exists. Then they will admit it exists but that they don’t use it when deciding on performance pay.
The gross negligence penalty
One of our tools at our disposal was a tool called gross-negligence penalty, which was a special penalty equal to 25% of tax assessed, on top of the regular 6% penalty. This penalty is designed to be nasty and only applied to situations where it appears obvious to you as the auditor that the taxpayer knew what they were doing when they made an error that either seems intentional or was the result of extreme carelessness.
In my almost 25 year career, I recommended the penalty three times. All three situations were egregious in my opinion, and I had to write a report to management justifying my recommendation to apply the gross negligence penalty. Management was supposed to cc these reports to the criminal investigations division to monitor the state of noncompliance.
One of the things you can do to increase TEBA is to add a gross negligence penalty to the assessment. The penalty recommendation report that I used to have to convince a manager to sign is now mandatory for most audit adjustments, and the auditor has to justify why they DON’T recommend the penalty.
How things are done today
Today, the penalty recommendation report that I used to have to prepare and convince a manager to sign, is now mandatory for all “significant” audit adjustments, and the auditor has to justify if they DON’T recommend the penalty.
The decline in audit quality over the last two decades is due at least in part to the use of performance measures that only benefit a few people. Thankfully, one thing unchanged is that audits still have to stand up to challenges in tax court. Auditor’s working papers, including the penalty recommendation report, are all available under Access to Information laws. Not being audited in the first place is still your best option, though.
Andrew Adolph is a CPA and former CRA auditor with 25 Years of experience. He helps businesses to not par any more in sales taxs than the law says they must and acts as an advocate for you if you are being audited, so you can fous on your business.